TMI Blog2011 (7) TMI 1227X X X X Extracts X X X X X X X X Extracts X X X X ..... cious stones and roughs on wholesale basis under the name and style of M/s. R.A. Gems. During the course of search, cash of ₹ 27,08,050/- was found out of which cash of ₹ 28.50 lacs was admitted as unaccounted in statement u/s 132(4) of the Act. During the course of search, many incriminating documents were found and seized. The statement of the assessee was recorded on 22June, 2007 u/s 132(4) of the Act. The AO in his order at page 3 has reproduced the relevant portion of the statement in which the assessee admitted the undisclosed income to the extent of ₹ 5.00 crores. The statement was recorded u/s 131 on 17-07-07 by DDIT (Inv.), Jaipur and the assessee enhanced the offer of undisclosed income to ₹ 6.00 crores n the basis of the seized incriminating documents. The relevant question and answer has been reproduced by the AO at page 3 of the assessment order and the undisclosed income shown in the returns by the assessee for the following three assessment years are as under:- Assessment year. Additional Income offered. 2006-07 Rs.1.00 crore 2007-08 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d as income but if the income disclosed by the assessee is more than the said amount, he adopted the amount disclosed by the assessee as income in that year. He also worked out interest on the debtors and assumed that the same is realized on year to year basis. Summarily the AO assessed the income of the assessee in various assessment years in the following manner:- A.Y. A.Y. Profit from Undisclosed d Trading Accrued interest on debtors Total income from trading and interest Net investment in Debtors /Cash Income offered by the assessee Income assessed by AO 02-03 - 86,940 86,940 23,00,000 - 23,00,000 03-04 - 1,91,287 1,91,287 - 1,91,287 04-05 - 2,47,834 2,47,834 9,00,000 - 9,00,000 05-06 - ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of search. (iii) Interest is invariably earned by the assessee from each debtor irrespective of the fact that rate of interest has been mentioned or not on the approval memo. (iv) In our society no prudent man will lend the money without interest particularly in money lending business. 2.6 The ld. CIT(A) restricted the addition to ₹ 32,39,690/- after giving the following findings. (i) The argument of assessee that no evidence was found in search that the interest was realized from the debtors is totally incorrect as the assessee in his statements recorded during post search proceedings, while explaining the nature of transactions recorded on the seized papers has stated in reply to Q. No. 10, 11 and 9 that these papers are in relation to calculation of interest. (ii) The argument of assessee that the amount outstanding in these slips are not recoverable and consequently interest cannot be charged, is incorrect as the appellant has recovered loan from many persons in different years. (iii) Another argument of assessee that the interest has to be taxed on cash basis in view of non-maintenance of regular books of account is also devoid of any merit, as the asse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... gh in book-keeping an entry is made about a hypothetical income which does not materialise. Where income has in fact been received and is subsequently given up in circumstances that it remains the income of the recipient, even though given up, the tax may be payable. Where, however, the income can be said to have not resulted at all, there is obviously neither accrual nor receipt of income, even though an entry to that effect might in certain circumstances have been made in the books of account. - Sri Kewal Chand Bagri Vs. CIT 183 ITR 207(Cal.): Income tax is a levy on income. Though the Income Tax Act takes into account two points of time at which the liability to tax is attracted, viz., the accrual of the income or its receipts, yet the substance of the matter is the income. If income does not result at all, there cannot be a tax, even though in book keeping, an entry is made about a hypothetical income which does not materialize. 2.9 On the other hand, the ld. DR supported the order of the AO. The ld. DR referred to the approval memo in which rate of interest is being mentioned. The assessee has admitted to have received the interest in advance for two to three months. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tors. The Hon'ble Bombay High Court in the case of FGP Ltd. Vs. CIT, 326 ITR 444 had an occasion to consider as to whether the disputed royalty can be considered to have accrued. The Hon'ble High Court following the decision of Hon'ble Apex Court in the case of Godhra Electricity Co. Ltd. Vs. CIT, 225 ITR 746 held that there is no real accrual of income. It will be useful to reproduce the following para from this decision The apex Court in Godhara Electricity Co. Ltd. (Supra) has laid down the test of assess income in the hands of an assesse. The assessee therein was also following the mercantile system of accounting and had made entries in the books regarding electrical charges for the supply made to the consumers, however no real income had accrued to the assessee company. The Tribunal had held that it represented hypothetical income and the AO was not right in assessing it to tax. Before the Supreme Court, it was urged that even in case of mercantile system of accounting tax can only be imposed if there is real income and income tax cannot be imposed on hypothetical income. The Court held even in mercantile system what has to be seen is whether income can be sai ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 145 has been carried out with the sole aim of checking the escapement of income, which occurred due to heterogeneous system of accounting followed by the assessee. Then it was found as a fact that the assessee has been following the same system and has also the same system in the immediately preceding years, and the same had been accepted by the Department. With this it has been found that in para 10 that for the purpose of showing the income of lease rent, the assessee had been following the receipt basis as accounting, even though otherwise he was following the mercantile system. Then the realities of life were considered about there being default in payment and disputes and sometimes the hirer refused to make payment. Then various judgments had been considered, and it was again considered, but the real income is to be considered with reference to commercial and business realities of the situation, and not merely with reference to entries made in the books of accounts. Then judgement of Hon'ble Supreme Court in Andhra Bank Ltd. Vs. CIT, (1997) 140 CTR (SC) 344 : (1997) 225 ITR 447 (SC) was followed, wherein it was held that there cannot be a tax if no income resulted, despite ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... price, export incentives, interest etc. revenue recognition is postponed to the extent of uncertainly involved in such cases, it may be appropriate to recognize revenue only when it is reasonably certain the ultimate collection will be made. Where there is no uncertainty as to the ultimate collection, revenue is recognized at the time of sale or rendering of service even though payments are made by instalments. 9.3 When the uncertainty relating to collectability arises subsequent to the time of sale or the rendering of the service, it is more appropriate to make a separate provision to reflect the uncertainty rather than to adjust the amount of revenue originally recorded. 9.4 An essential criterion for the recognition of revenue is that the consideration receivable for the sale of goods, the rendering of the service or from the use of others of enterprise resources is reasonably determinable. When such consideration is not determinable within reasonable limits, the recognition of revenue is postponed. 9.5 When recognition of revenue is postponed due to the effect of uncertainties, it is considered as revenue of the period in which it is properly recognized. 2.15 If w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd utilized for payment of debts. 3.2 The assessee paid the tax of ₹ 45,57,1160/- on the income offered by him. Such tax was paid out of ₹ 49.00 lacs from debtors which was offered to tax on the basis of approval memos during the search. The AO required the assessee to submit complete name and address and confirmation of the outstanding debtors from whom the amount has been realized. Since this information was not provided, therefore, the AO added back a sum of ₹ 49.00 lacs. 3.3 The ld. CIT(A) deleted the addition after observing as under:- The CIT(A) deleted the addition holding that considering the very nature of debt which was unaccounted and offered for tax by the assessee, the realization from these advances would not strictly confirm to all the 3 ingredients namely name, creditworthiness and genuineness of the transactions. It is also held that these are not new loan taken by the assessee but it is recovery from the debtors on which tax has already been paid by the assessee admitting it as unaccounted debts. The addition on realization of these advances would certainly result into double addition. The CIT(A) relied on the decision of Hon ble ITAT ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ue has been decided by Hon ble ITAT, Jaipur bench in case of Madanlal Jain vs. ACIT in ITA No. 198/Jp/2005 dated 13-10-2006 (PB 67-87) wherein the AO made addition of ₹ 77,20,000/- on the ground that evidence of realization of hundies utilized for payment of taxes could not be furnished by the assessee but Hon ble ITAT deleted the said addition. The findings given in this order is reproduced at page 12 of the order of CIT(A). 3.6 We have heard both the parties. The assessee has offered the income on the basis of the debtors mentioned in the documents and the approval memo. In respect of transaction recorded outside the books of accounts, it is not possible by the assessee to procure confirmation from the parties. Once it is accepted that there were debtors from which the amount can be realized then the contention of the assessee is to be accepted and such amount has been utlised from the debtors. We therefore, feel that the ld. CIT(A) was justified in deleting the addition of ₹ 49.00 lacs.. 4.1 The second ground of appeal of the assessee is that the ld. CIT(A) has erred in confirming the disallowance of ₹ 24,880/-. 4.2 The AO disallowed expenses out of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... such interest is to be considered as accrued when the debt is realized. Since the debts have not been realized therefore, the addition in respect of interest could not have been made. 5.6 The other grounds of appeal in respect of disallowance of expenses to the extent of ₹ 11,151/- by the ld. CIT(A) as against ₹ 16,535/- made by the AO. We have perused the orders of the lower authorities. We feel that the ld. CIT(A) was justified in restricting the disallowance to ₹ 11,151/-. 6.0 Now we take up the appeal of the assessee for the assessment year 2005-06. 6.1 The first ground of appeal of the assessee is that the ld. CIT(A) has erred in confirming the addition of ₹ 42.25 lacs 6.2 This issue is similar to the issue considered in the case of the assessee for the assessment year 2002-03. Following our findings for the assessment year 2002-03, we hold that the ld. CIT(A) was justified in confirming the addition of ₹ 42.25 lacs. 6.3 The alternate submission is in respect of allowing set off of excess income against returned income for the assessment year 2006-07 to 2008-09. Following our finding in respect of assessment year 2002-03, this alternat ..... X X X X Extracts X X X X X X X X Extracts X X X X
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